Taxpayers on the Hook for Retiree Costs for Federal Contractors

A surprising new government report shows that taxpayers have been footing the bill for retiree benefits not just for federal workers, but for independent freelance contractors who do work for the government as well.

And no one is watching the store to see if your tax dollars are being wasted.

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Taxpayers for years have been covering private contractors' retiree costs for things like pensions and health care, even though these workers are not on the federal payroll.

Taxpayers also cover these retiree costs for contractors' spouses, too, and in some cases if contractors want to retire early (at age 50), just like regular federal workers, many can then get taxpayer-funded coverage, says an official at the Government Accountability office.

For the Department of Energy alone, overall this coverage cost taxpayers $6.8 billion over the last 10 years, according to the new GAO report recently sent to Congress. Nine out of ten dollars spent on the DOE's annual budget goes towards contracts, including contractor retiree benefits.

The problem is, the GAO tells FOX Business it only knows about this problem at the DOE -- no one in government knows, or is tracking with regular, transparent reports to Congress, the tax money going out the door for these costs at other agencies, like the Pentagon, Homeland Security, the National Institutes of Health, or NASA.

The lion's share of the DOEs workforce is private contractors, most of whom work in the nuclear energy sector. DOE has the largest private contractor workforce in the federal government.

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We can't speak for other contractors, but what we found at DOE is that these numbers were not transparent to Congress and recommended they be more transparent, the GAO tells FOX Business.

Also, no one in government is tracking whether taxpayers are double-covering retiree costs for workers employed at big companies that already cover them, like Boeing (NYSE:BA) or Lockheed Martin (NYSE:LMT). Moreover, the GAO says in a new report the DOE has to set aside "significantly" more funds for these costs "since the economic downturn."

The GAO adds that the DOE has "limited influence" over reining in contractor retiree benefit costs. "By contract, DOE must reimburse these costs," the GAO says. The DOE reimburses the companies directly.

The GAO reports that the DOE says it is facing budget strains due to covering these costs. "DOE will likely continue to face significant challenges managing the costs of those benefits and mitigating their impact on funding available for the department's mission activities," its report said.

Most of DOEs budget for contract work is to hire freelance companies that do things like cleanup work at nuclear sites, or do outsourcing work running the business operations of our nations laboratories.

DOE bears the responsibility, according to its contracts, for reimbursing contractors for retiree benefits for an estimated 200,000 people, including 100,000 current and former contractor employees, and 100,000 beneficiaries of those employees, such as spouses.

Taxpayer costs for federal contractors retiree benefits at the DOE has been volatile. They ranged from as little as $43 million in 2001 to as high as three quarters of a billion dollars in 2009, the GAO says. In fiscal 2008 to 2009, such costs more than doubled, the GAO adds, because of a drop in the interest rate used to calculate contractors pension plan liabilities, and because the pension assets plunged in value as the overall market dropped due to the financial crisis.

As is the case across the board, volatile investment returns can drastically impact pension contributions for government contractors, and in turn taxpayer costs to cover them. "As a result, DOE ultimately bears the investment risk incurred by the contractor sponsoring the plan," the GAO said in its report.

At the same time, federal refunds for contractors health care benefits grew by 10%, to $389 million. But all the DOE can do in the face of such funding problems, the GAO says, is to urge contractors to make appropriate investment choices that reduce volatility. It has no power to restructure these plans, the GAO says, as its role is limited to oversight, even though it could do so at the contract stage. The DOE also does not give guidance on how to pick the right coverage nor does it tell contractors how they should allocate plan assets, says the GAO.

The DOE is moving to advocate to contractors that they use 401(k) plans, instead of traditional pension plans that guarantee retirees get set payments each month.

The GAO also reported back in 2008 that the DOE has taken steps to tackle the cost of these benefits that contractors offer to new workers. But the GAO says those moves "were not expected to substantially affect the department's contractor pension and other post-retirement benefit costs for the next 20 to 30 years," since current employees would still earn benefits on their existing plans.

Each contractor negotiates its own pension benefits separately, so reimbursements vary widely among the 50 pension plans the DOE covers. The GAO said a dozen of the contractor pension plans make up 86% of the DOE's total contractor pension liabilities, with the three largest plans accounting for more than a third of all of the DOE's pension liabilities.